IFRS 13: Incorporating Non-Performance Risk in Interest Rate and Foreign Exchange Derivative Valuations in Accordance with IFRS 13
The objective of this white paper is to discuss the process, methods, and assumptions used to incorporate non-performance risk in valuations of interest rate and foreign exchange derivatives in accordance with the provisions of International Financial Reporting Standard 13, Fair Value Measurement (IFRS 13). IFRS 13 requires that valuations incorporate the assumptions that market participants would use in performing valuations of financial instruments measured at fair value. Accordingly, a key objective of this white paper is to provide an in-depth discussion and “real-world” examples of the process used by most dealer banks (and major market makers) to price credit risk and calculate credit/debit valuation adjustments for derivatives in the marketplace. In addition, the paper addresses several related issues, such as the impact of IFRS 13 on hedging relationships and factors to consider when evaluating the significance of unobservable inputs.